Is there definitetive answer about whole life insurnace in regards to the cash value? Is the cash value paid out at the end or is it capped at the benefit amount? Say if you have a 1M policy but a bull market runs the cash value to 25M, do your descendent get 25M or just 1M?
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Are you referring to whole life or universal life insurance? With whole life insurance, the cash value must grow to match the face value by age 121. If you reach age 121, you’ll get a check called an endowment.
So, the cash value is always less than the face value.
Whole life insurance companies primarily earn money from long-term bonds. They also make some money from policy loans and selling products like indexed universal life insurance.
I’m not sure what you mean by “bull market run.” A whole life insurance company can have fewer payouts in a year, which allows them to distribute more leftover premium as dividends. However, there isn’t anything like “the market rose by 100%.” That’s also why market crashes won’t affect you.
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I don’t understand why someone who has built up a lot of cash value over 20-30 years can’t simply use that, withdraw it as cash without it being deducted from the death benefit of the policy. Is this correct?
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Insurance is not an investment. If you want an investment, buy one. The cash value has special tax treatment, which is why you can’t just withdraw it.
The reality is that with paid-up additions to prevent the policy from becoming a modified endowment contract (MEC) and the fees built into indexed universal life (IUL) policies, you won’t have to worry too much about a strong bull market negatively affecting your policy.
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The cash value contributes to the death benefit. If you reach age 121, the total of all your premiums plus interest will be the death benefit.
If you don’t reach that age, the death benefit equals the face value minus the cash value. The life insurance company uses other premiums and fees to cover the “net amount at risk.”
You can also choose to quit. If you do, the net cash value is what your death benefit is worth at that time, and they will send you a check, ending your future death benefit. That’s why it’s called the “surrender cash value.”
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There are two death benefit options. One option is called the increasing death benefit, which adds the cash value to the death benefit. The other option is the level death benefit, where the cash value reduces the amount at risk for the insurance company.
For example, with a $1 million policy that has the increasing death benefit option, if the cash value increases by $100,000, the total death benefit would also increase by about $100,000. In contrast, with the level death benefit option, the cash value would not increase the death benefit. Instead, it would lower the amount at risk for the insurance company, reducing the internal charges you pay.
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With permanent insurance, if the cash value grows close to the death benefit, the policy will reach a point called the corridor. This means the death benefit will increase to maintain a gap between the cash value and the death benefit so the policy still qualifies as life insurance.
To answer your question: yes, if the cash value in a $1,000,000 death benefit policy grows to $25,000,000, the death benefit will also increase to over $25,000,000.
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The market doesn’t really affect whole life. They’re funded by dividends from the company.
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The death benefit increases, but I think you’re talking about variable life insurance, not whole life. It’s a shame that many people find these terms confusing and can’t tell the difference. It’s like calling a bond a stock, an ETF an option, or a swap a mutual fund.